BofA expects month-end flows to give dollar only slight support

Heading into the month-end fix, BofA's rebalancing model flags outflows in EUR/USD and GBP/USD, according to the bank. The firm's note reads:

"We estimate FX rebalancing needs based on a conventional 60/40 portfolio of global equities & bonds. The underperformance of USD vs GBP & EUR denominated assets over August suggests rebalancing out of GBP (-1.3σ) and EUR (-0.6σ) and into USD."

The scale may be limited, but there could already be traces of this in trading this week. EUR/USD and GBP/USD have both fallen on the week, with the move mostly stemming from a midday decline in Europe on Wednesday that followed mixed US figures. EUR/USD is down 0.3% so far this week, while GBP/USD has lost 0.4%.

Trading today has been relatively subdued so far, but aside from possible month-end distortions, the bigger focus for market participants is likely to be Fed Chair Warsh's keynote address in Jackson Hole later. The address is timed to take place just ahead of the London fix, making it likely to dominate flows in the broader picture. That said, the session could still get chaotic as the month-end fix approaches later.

On the whole, BofA's model points to a very light impact, if any, from August month-end flows. The full breakdown is as follows: